Publication Type
Working Paper
Version
submittedVersion
Publication Date
11-2010
Abstract
This paper examines whether capital flows by foreign institutions improve liquidity in domestic markets. I find that stocks with increased foreign institutional ownership subsequently experience higher liquidity. However, it is difficult to interpret this evidence as a causal relation because institutions tend to self-select into more liquid stocks. To solve this problem, I exploit the 2003 US dividend tax cut as a natural experiment. The results from a 2SLS (IV) regression confirm that liquidity improved more in dividend-paying stocks located in US tax-treaty countries compared to similar stocks located in non-treaty countries. These patterns are consistent with the notion that institutions improve liquidity through a variety of channels including information competition and greater liquidity trading.
Keywords
Institutional Investors, Foreign Investors, Liquidity
Discipline
Finance and Financial Management | Portfolio and Security Analysis
Research Areas
Finance
First Page
1
Last Page
45
Identifier
10.2139/ssrn.1571220
Embargo Period
9-13-2021
Citation
WEI, Chi Shen.
Do foreign institutions improve stock liquity?. (2010). 1-45.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/6779
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.2139/ssrn.1571220